NEW YORK (TheStreet) -- Grocer Whole Foods (WFM) has one message for rivals such as Target (TGT) - Get Target Corporation Report , Walmart (WMT) - Get Walmart Inc. Report and Kroger (KR) - Get Kroger Co. (KR) Report that are trying to sell more organic food to customers in 2015: Bring it on.
While its competitors have rapidly increased their sales and offerings of organic foods in the last year, Whole Foods co-CEO Walter Robb said in an interview with TheStreet that his company still holds a considerable edge. "A lot of our product is produced specifically for our standards, it's not like someone could go out and replicate us tomorrow," said Robb, who has held the top spot at Whole Foods along with founder John Mackey since 2010. Whole Foods also plans to continue lowering prices on organic produce, open over a hundred fancier-looking stores and remodel many older locations.
Shares of Whole Foods are down 16.9% this year, mostly reflecting a plunge earlier in the year sparked by concerns of slowing comparable store sales growth and margin pressure borne from increased competition. But the stock has since recovered some 15% in the last six months, as Whole Foods has demonstrated to Wall Street its efforts to reignite sales through cheaper prices and store remodels are yielding results.
Discount retailers and traditional grocery stores have achieved impressive results in selling organics.
"We had double-digit percentage growth (sales) in natural organics, and if you go back to our Simple Truth brand, we'll hit a billion dollars this year," remarked Kroger senior vice president and CFO Mike Schlotman in an earnings call on Dec. 4. Kroger continues to add more organic food products in dairy and lunch meats. Walmart's warehouse business Sam's Club is on a pace to double the number of organic foods it sells to members by the end of 2014. Recent introductions in the organic category have included chia seeds, breakfast bars and squeezable fruit pouches. Meanwhile, Target has brought a number of exclusive organic and natural items to its shelves in partnership with its suppliers, and new chairman and CEO Brian Cornell has hinted further news on the organic food front is coming in early 2015.
But Whole Foods' competitive advantage has always been the stores themselves, which are jam-packed with everything from an eclectic range of fresh and packaged food to unique sit-down dining experiences. The status quo inside a Whole Foods stores is now being shaken up a bit. "What you can expect is that every new store will have some new ideas, " said Robb. Some of those new ideas run from the in-house microbreweries that could be found at one Houston store and at another across the street from where California's San Jose Sharks hockey team skate, to fresh takes, or "fusions", of prepared food. Whole Foods now has bars/taverns in more than 110 of its stores.
Whole Foods will cut the ribbon at 41 stores in its current fiscal year that ends in September next year, headlined by three large flagship locations opening between January and February of 2015. A Whole Foods flagship store is about 50,000 square feet and often placed in highly visible, dense urban markets. The average size of a Whole Foods has gotten bigger in the past five years, mentions Robb, jumping from 39,500 square feet to today being at 42,000 square feet. With the 114 new stores that are presently in development, including a specific push into the Canadian market, Robb estimates the average store size will increase to 44,000 square feet.
When Whole Foods is not debuting new stores, it's quickly undergoing remodels of older locations in a bid to keep loyal customers hooked and gain the attention of non-fanatics of the brand. Whole Foods will complete 40 store remodels in its current quarter, and a whopping 200 (half the chain) by the end of its fiscal year in September. The extent of the facelifts, according to Robb, vary from spruced-up décor to a $4 million remodel that features completely redone areas inside the store and new equipment. "At a minimum, they are all getting an up to date refresh on the décor, and the look and feel of the store, the messaging of the store so that they feel contemporary -- what happens typically is that the customer responds right away in a positive way."
The longtime knock on Whole Foods has never been substandard looking stores, however, but that its healthy organic and natural foods ate up a person's entire paycheck. That created an opening for Target, Walmart and Kroger to encroach on Whole Foods' turf by introducing cheap private label organics. But Whole Foods has now responded, lowering prices on produce, or what it refers to as the perimeter of the store.
The efforts are starting to pay off in the form of an uptick in sales growth. "We are very pleased with the results," said Robb of customers' response to more affordable produce prices, adding the company "expects to have more to say about it in its February earnings call" but is "already thinking about the next generation of investments, and how we want to continue doing this as we true up to the marketplace."
As of Nov. 2, Whole Foods comparable stores were up 4.6% in its first fiscal quarter -- in the quarter-ended Sept. 28, comparable store sales increased 3.1%.
The pricing investments are a double-edged sword, however: Profit margins are hurt, but traffic to Whole Foods stores increase, and so do sales. In Whole Foods latest quarter, it represented the 11th consecutive quarter the company did not fully pass through higher product costs to customers. Gross profit margins fell 21 basis points year-over-year, which brought the full fiscal year decline to 30
No matter the challenges and opportunities that lay ahead for Whole Foods in 2015, one thing is unlikely to change -- the fundamental shift in the U.S. to people demanding to know where their food is sourced and the quality of the ingredients they are eating. That ultimately plays right into the hands of Whole Foods.
Whole Foods is also trying to bring a slice of that new Americana to lower income areas.
The company has already opened four stores in what is known as food deserts, or economically sensitive towns that lack access to fresh food. Two of the four are under construction -- one on the Southside of Chicago and the other in downtown Newark, N.J. "These stores tend to be a little smaller, in the 20,000 square foot range," pointed out Robb. Due to the lower cost structure of the store, Whole Foods is able to reinvest the savings in affordable price points. Or, in some cases, the company has a larger selection of conventionally grown produce vs. organically grown produce so that budget-minded customers could have greater price choices. "They want the same sorts of choices that other people have, and they want to be able to make the choice -- there is a certain amount of dignity in all of this."
TheStreet Ratings team rates WHOLE FOODS MARKET INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate WHOLE FOODS MARKET INC (WFM) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, increase in net income, good cash flow from operations and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."
You can view the full analysis from the report here: WFM Ratings Report
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.